Daily Market Update

EU Isn’t Ready for the Next Recession

– ECB has just loosened monetary policy. What if that isn’t enough?
– ECB says the risks to Europe’s economies lean to the downside
– Trade wars could get worse and political turbulence could increase
– Brexit, could deliver an especially brutal blow
– Euro set to depreciate against gold (see chart)

By Bloomberg Editorial Board

The European Central Bank surprised financial markets yesterday with moves to loosen monetary policy.

The prospects for growth in the euro zone have dimmed lately, and policy was going to be tweaked at some point unless things picked up. But a change wasn’t expected so soon. ECB President Mario Draghi and his colleagues are apparently worried.

They have reason to be. Their main problem, however, isn’t the precise timing of monetary adjustments like the ones announced this week. It’s the lack of good options if things get any worse.

The ECB’s new projections show growth in the euro zone slowing this year to just 1.1 percent; in December the central bank had predicted 1.7 percent. That’s roughly in line with other recent downgrades from the International Monetary Fund and the Organization for Economic Cooperation and Development.


Gold in Euros – 10 Year (GoldCore)

The picture varies a lot from country to country within the euro area, and a number of one-off factors have been at work — but across the bloc, slowing international trade and rising political uncertainty have taken a toll. The OECD expects growth of just 0.7 percent this year in Germany, for instance; it thinks Italy’s output will be lower than last year, and will manage only a feeble recovery in 2020.

In response the ECB said its policy rate will stay at zero at least through December, extending its previous guidance by months. And it announced new issues of cheap long-term loans to banks. Yet the actual stimulus provided by these measures will be small at best. In fact, the combination of signaling new concern about the prospects and announcing changes with limited force could turn out to subtract from future demand rather than add to it.

Given its own rules, there’s not much else the ECB can do. The policy rate is zero, and the central bank’s deposit rate is slightly negative. Taking rates farther into negative territory might rattle confidence and destabilize the financial system. Meanwhile the ECB’s enormous bond-buying program, which was paused three months ago, is constrained by rules about the composition of its holdings. These were intended to stop the central bank from disproportionately financing the outlays of high-borrowing countries — such as Italy. They mean the ECB has more or less run out of room.

Monetary policy isn’t enough — and if slow growth in the euro zone should tip into outright recession, Europe will no longer be able to avoid a drastic rethinking of macroeconomic policy. The lack of a sufficiently powerful fiscal instrument is already holding the bloc back. The consequence has been high unemployment, slow growth and less-than-target inflation. If things get any worse, the only effective remedy would be a forceful, coordinated push from tax cuts and/or higher public spending.

Year after year, Europe has dodged this necessary discussion. No further delay should be tolerated. Even after cutting its growth forecasts, the ECB says the risks to Europe’s economies lean to the downside.

Trade-policy frictions could get worse, not better. Political turbulence could increase, not subside.

And Brexit, a big setback for Europe on any plausible projection, could deliver an especially brutal blow if no deal is reached to minimize the disruption.

The ECB says that outright recession is unlikely. If it’s wrong, policy makers will be all but helpless.

Europe can no longer risk being so seriously underequipped. It needs an effective fiscal-policy instrument — at the very least, a bold new approach to fiscal coordination. With the risks mounting, the problem demands immediate attention.

Courtesy of Bloomberg News

 

 

News and Commentary

 

Global Stocks Extend Slide Amid Concerns on Growth: Markets Wrap (Bloomberg.com)

Gold prices finish lower as ECB news pressures the euro, lifting the dollar (MarketWatch.com)

ECB seen taking tentative step to prop up ailing euro zone (Reuters.com)

Wall Street drops for fourth day as ECB stokes growth worries (Reuters.com)

U.S. household wealth posts record loss in fourth-quarter amid stock rout (Reuters.com)

China’s gold reserves continue to grow in February (XinhuaNet.com)

Europe Isn’t Ready for the Next Recession (Bloomberg.com)

BlackRock CEO Larry Fink Says Modern Monetary Theory Is ‘Garbage’ (Bloomberg.com)

“This Is Bad” – European Banks Tumble As ECB Unveils Massive Easing: Here’s Why It’s Not Working (ZeroHedge.com)

Chinese Exports Collapse In February Despite Largest Credit Injection Ever (ZeroHedge.com)

QE – Then, Now, & Why It May Not Work (RealInvestmentAdvice.com)

Philadelphia Is First U.S. City to Ban Cashless Stores (WSJ.com)

Gold Prices (LBMA PM)

07 Mar: USD 1,285.30, GBP 921.20 & EUR 1,144.17 per ounce
06 Mar: USD 1,285.55, GBP 978.82 & EUR 1,136.82 per ounce
05 Mar: USD 1,285.00, GBP 975.19 & EUR 1,134.78 per ounce
04 Mar: USD 1,287.45, GBP 972.93 & EUR 1,135.14 per ounce
01 Mar: USD 1,309.95, GBP 989.27 & EUR 1,152.23 per ounce
28 Feb: USD 1,325.45, GBP 996.21 & EUR 1,162.82 per ounce

Silver Prices (LBMA)

07 Mar: USD 15.07, GBP 11.47 & EUR 13.33 per ounce
06 Mar: USD 15.09, GBP 11.49 & EUR 13.36 per ounce
05 Mar: USD 15.11, GBP 11.47 & EUR 13.33 per ounce
04 Mar: USD 15.16, GBP 11.50 & EUR 13.38 per ounce
01 Mar: USD 15.56, GBP 11.75 & EUR 13.67 per ounce
28 Feb: USD 15.81, GBP 11.89 & EUR 13.85 per ounce

Recent Market Updates

– China Gold Reserves Rise To 60.26 Million Ounces Worth Just $79.5 Billion
–  JPMorgan Is Bullish on Gold as a Hedge Against Rising Inflation
– Gold – It Might Be Different This Time
– Euromillions Winners To Invest In Gold In 2019?
– Gold Still on a Long Term Track to Reach $2,000 An Ounce
– “Gold Is A Global Thermometer Of Risk” – CEO Q+A: Stephen Flood, GoldCore
– U.S. Mint Suspends Silver Bullion Coin Sales After Sales Double In February
– MMT: Modern Monetary Madness Will Lead To Higher Taxes and Inflation

Mark O'Byrne
Executive Director

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